Grampian Haulage Ltd (in liquidation) v Carnbroe Estates Ltd : Decision of UK Supreme Court

Background

Practitioners in Scotland have been waiting for some time for the outcome of the UK Supreme Court appeal in the case of the Liquidators of Grampian Haulage Ltd v  Carnbroe Estates Ltd.  It will be recalled that this case surrounded the sale of a property by Grampian in the lead up to insolvency, at a price of £550,000 at a time when the property was said to be worth £740,000 to £820,000. 

At first instance, the Court of Session held the consideration that had been paid was adequate.  However, on appeal, the Inner House of the Court of Session completely disagreed.  It held that there was no justification for selling assets given the business of the company was not going to be saved, and the assets should have been left for a liquidator to deal with.  The net effect of the sale had been that a secured bank debt was paid off but HMRC were left completely unpaid as creditors.    The price reduction was unjustified and the consideration inadequate.

UK Supreme Court Appeal

Lord Hodge delivered the opinion of the court on 4 December 2019.  In a typically helpful and incisive judgement Lord Hodge held that there were two issues that arose on the appeal:  How was the court to approach whether consideration was adequate and how did that apply in this case?  Secondly, what remedy was appropriate if consideration was inadequate?

On the first question it was again held by the Supreme Court that the Inner House were correct.  That is, there was no justification in an urgent sale significantly below market value.  However, the Supreme Court took a different view on the formulation of what “adequate consideration” meant. Adequate consideration related to whether the price paid was commercially justified in the context; assuming parties acting in good faith and at arms length; sometimes if reasonably considered a business might be saved a price reduction of some sort may be justifiable.

On the second question the court noted that the Scottish courts had previously interpreted s.242 of the Insolvency Act (Scotland) 1986 to the effect that reduction of a transaction must be granted  if the court held that a gratuitous alienation had taken place.  The court considered that where substantial consideration had been paid, but that that consideration was inadequate, it represented an injustice that Scots Common Law would not allow if reduction without compensation was payable.  The court therefore held that s.242 should be interpreted to the effect that the court has power to regulate how such instances should be dealt with; for example requiring the liquidator to repay a portion of the proceeds of a sale to a defender.   The appeal was partially allowed in this case to that extent.

Analysis

This is a very important case that will change the analysis of many alienation claims.  We will have to wait to see how the courts deal with the second question that has now been raised by the Supreme Court.  For example, will we see awards of payment (which could be worthless in certain cases) in relation to the balance of value that would be required to make consideration adequate; or will office holders have to give undertakings to the court to pay a certain amount from sale proceeds after reduction has been granted?  This is certainly a case all practitioners operating in Scotland should acquaint themselves with.

BBM Solicitors specialise in advising IP’s in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal (emb [AT] bbmsolicitors [DOT] co [DOT] uk).This briefing note is current as at 4 December 2019 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).